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Brazil recession: Will President Lula’s fiscal policy send Brazil into a recession?

By Mensholong Lepcha

Edited by Jekaterina Drozdovica


Brazil Flag waving against white background stock image
JP Morgan saw Brazil entering a technical recession in 2023. Photo: pranavesc / Shutterstock

Brazil’s economy is expected to slow in 2023 with some expecting the Latin American country to enter a technical recession in the first half of 2023.

Market experts fretted over newly-appointed President Luiz Inacio Lula da Silva’s spending plan which is seen as a key risk to Brazil’s economic stability in the face of high inflation and elevated interest rates.

Will we see an economic crisis in Brazil in 2023? Here we take a look at Brazil’s recession history, economic outlook and more below.

What is a recession?

A recession is defined as a period of a widespread fall in economic growth in a region. Recessions are identified by monitoring gross domestic product (GDP) growth figures. 

If an economy posts two consecutive quarters of negative GDP growth then it is said to be in a technical recession.

Historically, the implementation of restrictive monetary policy which includes raising lending rates in a country has been a key driver of recessions.

Recessions are generally characterised by increased job layoffs and unemployment. During such a period, consumption of goods and services is slow and corporations resort to cost-cutting measures.

Simultaneous recessions occurring across different sectors and regions are quite common. According to the International Monetary Fund (IMF), most globally synchronised recession episodes have coincided with recessions in the US, the world’s largest economy.

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Brazil’s recession history 

In our study of Brazilian recession history, we looked at economic data compiled by The World Bank.

Historical GDP data showed that Brazil has suffered from multiple recessions since the turn of the new millennium.

Brazil’s annual GDP growth, 2000 - 2021

A Brazil economic recession occurred in the aftermath of the Global Financial crisis of 2007-2008. Annual GDP growth decelerated from 6.1% in 2007 to 5.1% in 2008 before slumping to negative territory of -0.1% in 2009.

The origins of Brazil's economic crisis in 2008-2009 were external in nature. Economic crises in countries across the world at the time saw a slowdown in Brazil’s export-dependent growth.

The nation saw a severe recession in 2015-2016 as annual GDP growth fell from 0.5% in 2014 to -3.5% in 2015 and -3.3% in 2016. This time the factors of the Brazil crisis were internal.

Brazil racked up unsustainable amounts of debt following a period of increased public debt and government subsidies. According to national public news agency Agência Brasil, the nation’s debt-to-GDP ratio rose from 51.3% to 57.2% in 2014 and to 66.2% in 2015.

“The percentage is much lower than that of Japan (229%) or Greece (179%), for example. The difference is that, while in several developed countries interest rates are zero or negative, in Brazil the interest rate is above 14%, which makes debt payments much more expensive and increases the risk of default,” said Agência Brasil.

Weakness in commodity prices at the time aggravated the situation. Prices of iron ore and crude oil – two major Brazilian exports – fell to multi-year lows in 2015 due to a slowdown in the Chinese economy.

More recently, Brazil’s economy experienced a sharp downturn following the emergence of the Covid-19 pandemic. The nation saw a period of technical recession in 2020.The Brazilian economy reported quarter-on-quarter GDP contraction in the last three quarters of 2020.

Is Brazil in a recession right now?

Based on official GDP data published by the Instituto Brasileiro de Geografia e Estatística (IBGE), the Brazilian economy was not in a recession as of 10 January 2023.

The latest GDP data from the third quarter of 2022 showed that Brazil’s economy grew 3.6% year-on-year and 0.4% quarter-on-quarter during the period.

Brazil’s annual GDP growth rate, 2020 - 2022

Economic growth was broad-based across all indicators, including agriculture, industrial, services, investment, household consumption and government consumption expenditure during Q3 2022, compared to the same period a year ago.

Brazil’s export-focused economy saw the value of its exports of goods and services increase by 3.6% quarter-on-quarter during the period.


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Brazil’s political turmoil hurts market sentiment

Looking forward to 2023, Brazil’s political dynamics remain a key area to monitor amid signs of instability in South America’s largest economy.

Brazilian President Luiz Inacio Lula da Silva’s reign that began in early January 2023 started on a wrong note as the local stock and currency market tanked on scepticism over Lula’s economic plans.

The leftist President’s plans included prioritisation of social issues and extension of fuel tax exemptions, which is expected to cost the government treasury about BRL52.9 bn ($9.9bn) annually in fiscal income, according to Reuters.

Reuters reported earlier that President Lula’s administration proposed the removal of the constitutional spending limit put in place in 2016 that allowed government spending to grow only as much as inflation.

"I'm against the spending cap … If you're responsible, you don't need a spending cap," President Lula was quoted in the build-up to the 2022 presidential election.

The markets showed their discontent as the Brazilian equity benchmark Ibovespa Index slumped over 3% and the Brazilian real (BRL) fell over 1% in Lula’s first full day in office on 2 January 2023.

Adding to President Lula’s challenges was the turbulent political scene in Brazil at the time of writing. On 10 January 2023, supporters of former President Jair Bolsonaro stormed Brazil’s National Congress on allegations of potential election fraud.

President Lula will also inherit the fight against inflation from his predecessor. Inflation in Brazil trended well above the central bank target of 3.5% in 2022. The annual inflation rate in Brazil peaked at over 12% in April 2022.

The latest inflation data published on 10 January 2023 showed the annual inflation rate easing to 5.79% in December 2022, down from 5.9% in November 2022.

The inflation target for 2023 was set at 3.25%, according to Banco Central do Brasil’s website.

Brazil economic forecast: Technical recession expected in Q1 2023 

JP Morgan expected Brazil’s economy to enter a technical recession – in terms of real GDP contraction – by the first quarter of 2023. The investment bank saw quarter-on-quarter real GDP growth to come in at -0.4% in Q4 2022, -1% in Q1 2023 and -0.6% in Q2 2023.

“Despite increasing signs of economic deceleration, Brazil’s economic performance in the current and coming quarters will largely depend on fiscal policy,” said JP Morgan in a 6 January note.

“A constitutional amendment allowing for new expenditures of 2% of GDP can preclude a further slowdown in growth at the start of this year, but at the expense of tighter financial conditions that may worsen the medium-term outlook.”

Fitch Ratings echoed this sentiment in its Brazil economic outlook. The agency said the South American economy is expected to slow in 2023 under the new government of President Lula.

“Uncertainty is high regarding Lula’s policy plans and the extent to which these could ease or aggravate fiscal and economic challenges … However, Fitch does not expect policies that jeopardize broad economic stability,” said the credit ratings firm. 

The Organisation for Economic Co-operation and Development (OECD) saw the Brazilian economy slowing from an annual GDP growth rate of 2.8% in 2022 to 1.2% in 2023, before recovering to 1.4% in 2024.

The main reasons for slowing growth were “deteriorating global outlook, tighter fiscal policy and the effects of higher interest rates.

“Lower commodity prices and the slowdown in major trading partners will reduce external demand. Tighter credit conditions will limit household consumption along with a slowdown in job creation in 2023,” said OECD.

The Brazilian central bank concurred, noting at its ultimate monetary meeting of 2022 that indicators were signalling a slowdown in economic growth. The Banco Central do Brasil said in a December 2022 report

“For 2023, the forecast remained at 1.0%, influenced by the expected global slowdown and the cumulative impacts of domestic monetary policy. The uncertainty surrounding the forecasts is higher than usual due to external (monetary policy, Ukraine, and China) and domestic factors (fiscal framework and stimulus in 2023).”

The central bank signalled that it could cut interest rates in 2023 and projected benchmark selic rates to fall to 11.75% by the end of 2023 from current levels of 13.75%, as of 10 January 2023.

Final thoughts on Brazil recession

Note that analysts' forecasts on Brazil recession can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence looking at the latest news, technical and fundamental analysis and a wide range of commentary. 

Remember that the future is uncertain and no one can predict it accurately. Past performance does not guarantee future returns. And never invest money you cannot afford to lose.


Why is Brazil in recession?

Based on the latest GDP data from Q3 2022, Brazil’s economy was not in a recession at the time of writing. However, JP Morgan saw Brazil entering a technical recession – in real GDP contraction terms – in the first half of 2023. Note, however, that analysts’ views can be wrong. 

Will Brazil's economy recover?

Economies recover from recessions as boom and bust periods are cyclic in nature.

How long does a recession usually last?

According to the IMF, a typical recession in the US prior to 2007 lasted about 11 months.

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